Financial Statement Explanation

The following financial statements for FY 2013 (prior fiscal
year), 2014 (current fiscal year) and 2015 (upcoming fiscal year) illustrate
how the state arrives at a balanced budget for each respective year.

But what does “in balance”, in this instance, mean? And how
do the financial statements go about determining whether the Commonwealth ends
a year in balance in accordance with that definition?

The definition of statutory balance can vary significantly
from that of GAAP or structural. Statutory balance is just that, a reflection
of statutory conditions informed by the Legislative process. Statutory balance
is outlined in state finance law (Massachusetts General Law Chapter 29 Section
5C).

Here is the definition of “balanced budget” according to
state finance law (as recently amended by Section 43 of Chapter 38 of the Acts
of 2013):

Section 5C. The comptroller shall
annually, on or before October 31, certify to the secretary of administration
and finance the amount of the consolidated net surplus in the budgetary funds
at the close of the preceding fiscal year. Except as otherwise provided by law,
the amounts so certified shall be transferred to the Commonwealth Stabilization
Fund. This transfer shall be made from the undesignated fund balances in the
budgetary funds proportionally from those undesignated fund balances; provided,
however, that no such transfer shall cause a deficit in any of those funds.
Before certifying the consolidated net surplus under this section, the
comptroller shall, to the extent possible, eliminate deficits in any fund
contributing to the surplus by transferring positive fund balances from any
other fund contributing to the surplus.

So what is the “consolidated net surplus”?

“Consolidated net surplus”, the sum of the undesignated balances in the
budgetary funds, except funds established by section 2H and section 2I and by
section 2C of chapter 131 and section 35NN of chapter 10.

So what is a
“budgetary fund”?

"Budgetary funds'' are state funds that are subject to
appropriation as provided in section six (of Chapter 29).

Budgeted operating funds are subject to appropriation of the
state Legislature and receive most of the non-bond and non-federal grant
revenues of the Commonwealth. Two of the budgeted operating funds account for
most of the Commonwealth’s spending: the General Fund and the Commonwealth
Transportation Fund. Further background on each of the operating budgeted
funds can be found in the “Budget Development” section of this document.

In essence, statutory balance is a measure of the fiscal
condition of the Commonwealth that requires, after accounting for current year
revenues and expenditures plus any designated revenues from prior years,
stabilization deposit and funds carried forward, that the budgetary funds (i.e.
General Fund, Commonwealth Transportation Fund, Massachusetts Tourism Fund,
funds created in the “Expanded Gaming” legislation and new funds proposed in
House 2) close the fiscal year with an ending balance in those funds greater
than $0. Any remaining undesignated balances after the calculation of the
Consolidated Net Surplus would be deposited into the Stabilization Fund. It is
important to note that not all of the budgeted operating funds are used to
calculate Consolidated Net Surplus. Some of them, such as the Inland Fisheries
and Game Fund and the Stabilization Fund, are excluded by law from the
calculation. Therefore any remaining balances in these funds at the end of the
year do not count toward whether the Commonwealth remains in balance.

As stated earlier, we are speaking in terms of “statutory
balance”, which means the Legislature can amend the definition of balance as it
sees fit. For example, in recent years a portion of the consolidated
surplus has been reserved for the Massachusetts Life Sciences Center. The
Governor’s FY 2015 budget provides $25 M in Consolidated Net Surplus funds for
the Mass Life Sciences Center.

Now that we have a better understanding of what the term
“balance” means in this instance, let us review a number of the lines from the FY
2015 Financial Statement to understand how balance is arrived at after
accounting for all of the various inflows, outflows and statutory conditions
placed on the state budget.

There are three main components to the Financial Statement:
beginning balances, current year revenue and spending, and ending balances.

Section 1. Beginning Balances

“Undesignated Fund Balance”

This line represents the undesignated closing balances in
the budgeted funds from the preceding year. This line is comprised of any
balance that remained in the budgeted funds that are not part of the
Consolidated Net Surplus calculation. The Inland Fisheries and Game Fund is one
such example.

“Stabilization Fund Balance”

This line reflects the FY 2014 ending balance
of the Stabilization Fund. The purpose of the fund was to create and maintain a
reserve to which any available portion of a consolidated net surplus in the
operating funds would be transferred to and from which appropriations may be
made for the following purposes: “(1) to make up any difference between actual
state revenues and allowable state revenues in any fiscal year in which actual
revenues fall below the allowable amount and (2) to replace the state and local
loss of federal funds or (3) for any event which threatens the health, safety
or welfare of the people or the fiscal stability of the commonwealth or any of
its political subdivisions”.

“Designated for Continuing Appropriations into FY2015”

This line includes the value of "Prior Appropriations
Continued'' or "PACs'', which are re-appropriated unexpended and
unencumbered monies from one fiscal year for the subsequent fiscal year. In
essence, the Legislature appropriated money in one fiscal year that for one
reason or another went unspent by the time that fiscal year closed. This money
is then carried forward to be made available for expenditure in the next fiscal
year.

“Designated for Debt Service”

This line represents unspent balances reserved for debt
service (where money must remain with the escrow agent after being transferred
there during the fiscal year). Due to certain covenants in debt service trust
agreements (for example gas tax bonds) the Commonwealth is required to deposit
specific streams of revenue with bond trustees. At the end of each fiscal year,
this revenue is held by the fiscal agent and applied to the following year’s
debt service. These amounts show as reserved or designated on the
Commonwealth’s financial statements, and reduce the undesignated balances.

Section 2: Current Year Revenue and Spending

“Current Year Revenues and Other Sources”

This section includes budgeted revenues and
other financial resources pertaining to the budgeted funds, such as inflows
from tax and non-tax sources, including Taxes, Federal Reimbursements,
Departmental Revenue and Consolidated Transfers, that are directed by law to be
accounted and reported to a fund which is subject to annual appropriation. Descriptions
of each revenue category are provided below.

“Gross Tax Revenues”

On or before January 15 of each year, the Secretary is
required to develop jointly with the House and Senate Committees on Ways and
Means a consensus tax revenue forecast for the following fiscal year. The
“Gross Tax Revenues” figure represents this consensus revenue estimate, upon
which the three branches base their respective budgets.

“Tax Initiatives”

Additional information regarding the Governor’s tax
initiatives can be found in the “Budget Development” section and Section 1A of
the Governor’s FY 2015 budget.

“FAS 109 Delay”

Additional information on this item can be located in the
“Budget Development” section of the Governor’s FY 2015 budget.

“Sales Tax Dedicated to the
MBTA”

The amount dedicated to the
Massachusetts Bay Transportation Authority is the amount raised by a 1% sales
tax (not including meals), with an inflation-adjusted floor.

“Annual State Contribution to the State Pension System”

Beginning in FY 2005, state finance law has required that
the consensus tax revenue forecasts be net of the amount necessary to fully
fund the pension system according to the applicable funding schedule, which
amount is to be transferred without further appropriation from the General Fund
to the Commonwealth’s Pension Liability Fund.

“Sales Tax Dedicated to the
SBA”

The amount dedicated to the
School Building Authority is the amount raised by a 1% sales tax (not including
meals).

“Workforce Training Trust Fund Transfer”

The FY 2012 General Appropriations Act included a reform to
the funding structure of the Workforce Training Fund by funding the program
through an “off-budget” trust fund. Tax revenues are now transferred into the
non-budgetary trust fund and the recently established trust fund is not subject
to appropriation.

“Federal Reimbursements”

Federal revenues are collected through reimbursements for
the federal share of entitlement programs such as Medicaid and through block
grants for programs such as Transitional Assistance to Needy Families (TANF).
The amount of federal reimbursements to be received is determined by state
expenditures for these programs.

“Departmental Revenue”

Departmental and other non-tax revenues are derived from
licenses, tuition, fees and reimbursements and assessments for services.

“Consolidated Transfers”

Consolidated transfers reflect inflows to the General Fund
from non-budgeted funds which include annual tobacco settlement proceeds
received as part of the Master Settlement Agreement with tobacco companies, net
revenues from the State Lottery Fund, fringe revenue to recoup the cost of
various statewide benefits assessed on non-budgeted funds and revenues from the
Commonwealth’s Unclaimed Property Division.

“Settlements and Judgments < 5 YR Median”

The
Governor’s FY 2015 budget refines the policy on settlements or judgments in
excess of $10 M to more closely align with the capital gains provision, which
sets a threshold above which capital gains collections are unavailable to
support budgetary expenditures and instead must be dedicated to the
Commonwealth’s Stabilization Fund. While each of these judgments and settlements
are one-time events there is a baseline amount of revenue that the Commonwealth
collects from these on an annual basis and can responsibly budget against. This
refinement would still preserve the primary goal behind the original provision:
isolating volatile revenues and segregating them into reserves.

“Tobacco Settlement Proceeds to OPEB”

In FY 2015, 30% of the state’s annual tobacco settlement
receipts, or $75.9 M, will be set aside to help prepare for this liability.
This percentage will grow each year by 10 percentage points (e.g., in FY 2015,
30% of tobacco settlement payments), until 100%, or an estimated $254 M, is
dedicated annually to help offset these costs.

“Appropriated Spending”

This line represents all appropriations made through various
appropriation vehicles – for the most part by the budget act and supplemental
spending bills.

It also captures:

"Prior Appropriations Continued''
or "PACs'', a phrase used to reappropriate unexpended and
unencumbered monies from one fiscal year for the subsequent fiscal year.
In this row we are spending what was carried in the“Designated
for Continuing Appropriations into FY 2014” row in the Beginning Balances
section of the document.

"Retained revenue'', the income of
state agency or other public instrumentality from its operations which by
law it is allowed to expend for a particular purpose up to a specified
limit without further appropriation which would otherwise be subject to
direct appropriation.

“Section 2E Operating Transfers”, a transfer of
funds from a budgeted fund to non-budgeted funds. An example of this is
the transfer from the General Fund to the Commonwealth Care Trust Fund.
The distinction between these transfers and the SBA, MBTA and Pension
transfers is that those are required by law to be netted from the Consensus
Revenue estimate and are not subject to appropriation.

“Contingency Reserve”

This row captures estimates for any potential further
appropriations that may be requested through supplemental budget legislation
for projected funding deficiencies.

“Unspent Appropriations Continued to Fiscal Year 2016”

This row reflects current year available spending that will
be carried forward to be spent in the next fiscal year, in other words it
represents current year PACs. PACs are reflected as a negative figure because
they are reducing the current year spending total. The distinction between this
row and the PACs carried in the “Direct Appropriations” row is that the latter
is spending PACs from the previous fiscal year whereas the former is PACing
money to the next fiscal year.

“Designated for Continuing Appropriations”

You may recall that the current year spending number does
not count PACs as being spent; instead it counts PACs as a reduction in total
available and therefore a reduction in total spending. However, showing PACs as
unspent would increase the Undesignated Fund Balance in a misleading way since
the extra balance created by the negative PAC entry is not undesignated and
cannot be calculated as part of the Consolidated Net Surplus. The PACs must be
considered spent or reserve for the calculation of surplus. This row
accomplishes this by adding the PAC number back in so that we can have an accurate
representation of “undesignated fund balances” that will ultimately be
calculated as part of the Consolidated Net Surplus.

“Fund Balance Deficit Elimination Transfers”

Prior to calculating the Consolidated Net Surplus, the state
Comptroller is under law required to eliminate deficits in any of the budgeted
funds by transferring positive balances, proportionally, in any other budgeted
funds that contribute to the Consolidated Net Surplus:

All transfers
specified in this section shall be made from the undesignated fund balances in
the budgetary funds proportionally from those undesignated fund balances, but
no such transfer shall cause a deficit in any of those funds; provided,
however, that prior to certifying the consolidated net surplus in accordance
with this section, the comptroller shall, to the extent possible, eliminate
deficits in any fund contributing to the surplus by transferring positive fund
balances from any other fund contributing to the surplus.

“Balances Reserved in Other Budgeted Funds”

As mentioned earlier, state finance law excludes balances in
certain budgeted funds from being used as part of the calculation of the
Consolidated Net Surplus. This line eliminates those balances from the calculation
as well as eliminating any funds that were reserved for future use, i.e., PACs.

Section 3. Ending Balances

“Consolidated Net Surplus”

Except as otherwise provided by law (see below), the amount
certified as Consolidated Net Surplus by the Comptroller shall be transferred
to the Stabilization Fund.